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Banks may face profitability pressures

Profitability and liquidity pressures on UAE banks are likely to grow as funding costs rise and the operating environment becomes more challenging due to volatile equity and real estate markets, according to analysts.

  • By Shakir Husain, Staff Reporter
  • Published: 23:30 December 16, 2008
  • Gulf News

Dubai: Profitability and liquidity pressures on UAE banks are likely to grow as funding costs rise and the operating environment becomes more challenging due to volatile equity and real estate markets, according to analysts.

Ratings agency Moody's said in a statement that liquidity conditions in the UAE weakened "significantly" during the third quarter of 2008.

Also, the flight of speculative deposits from the country created substantial short-term liquidity pressures, which prompted the UAE Central Bank to offer emergency liquidity support facilities.

"Moody's recognises that the currently excellent asset quality and profitability levels reported by all UAE banks - as a result of the benign credit environment up until autumn 2008 -may be negatively affected going forward," John Tofarides, an analyst in Moody's Financial Institutions Group, noted.

Revision

The agency said it has revised downwards the outlooks on the ratings of Abu Dhabi Commercial Bank (ADCB), First Gulf Bank (FGB), and Dubai Islamic Bank (DIB) to "negative" from "stable", while the rating outlook on Dubai Bank (DB) has been changed to "stable" from "positive."

Noting the slowdown in returns on investments and demand for property, the agency said it will be particularly "cautious" with banks whose "loan composition appears to be largely tilted towards real estate and construction loans."

Deepak Tolani, senior associate of equity research at Al Mal Capital, told Gulf News that quantifying loans in those two segments was hard, but estimated them to be 15-25 per cent of all lending.

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